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#2010-037

Pro-Poor, Entrepreneur-Based Innovation and it’s Role in Rural Development

Lina Sonne

Working Paper Series

United Nations University - Maastricht Economic and social Research and training centre on Innovation and Technology

Keizer Karelplein 19, 6211 TC Maastricht, The Netherlands Tel: (31) (43) 388 4400, Fax: (31) (43) 388 4499, e-mail: info@merit.unu.edu, URL: http://www.merit.unu.edu

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Pro-Poor, Entrepreneur-Based Innovation

and it’s Role in Rural Development

Lina Sonne*

UNU-MERIT

Abstract

Innovation spurs economic growth and development. Pro-poor innovation in rural areas is more likely to

occur through small-scale ventures and entrepreneurs than industrial research and development. Whilst

previous rural development policies have focussed on small-holder agriculture, the fact is that most rural

poor are landless poor and therefore unlikely to benefit greatly from agriculture-based policies. Instead

most poor are entrepreneurs, running micro ventures, often at subsistence levels in both agriculture

related and non-farm sectors. Though most rural poor are entrepreneurs out of necessity, a few are

opportunity entrepreneurs pursuing a profitable business, innovating and looking to grow. These are the

growth focussed entrepreneurs that are likely to have a large indirect effect on the poor by providing

employment opportunities as well as improved good and service. This paper discusses the concept of pro-

poor entrepreneur-based innovation (PEBI) by reviewing existing literature on rural development,

innovation and entrepreneurship.

Keywords: Pro-poor innovation, entrepreneurship, rural development

JEL Codes: O18, O31, Q18, R51

The views expressed in this paper are those of the author and do not necessarily reflect those of

UNU-MERIT. I am grateful to Robin Cowan and Andy Hall for helpful suggestions and

comments.

* UNU-MERIT, Keizer Karelplein 19, 6211 TC, Maastricht, The Netherlands, email: sonne@merit.unu.edu

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UNU-MERIT Working Papers ISSN 1871-9872

Maastricht Economic and social Research and training centre on Innovation and Technology,

UNU-MERIT

UNU-MERIT Working Papers intend to disseminate preliminary results of research carried

out at the Centre to stimulate discussion on the issues raised.

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1. Introduction

Innovation is central to economic development. (Edquist, 1997, Freeman, 1987, Hall et al., 2003,

Lundvall, 1992, Spielman, 2005).1 Of particular interest in developing countries is rural

innovation since it is in rural areas that most of the poor live (WB, 2008).2 Whilst previous rural

development theory, including innovation-related policy, has focussed on small-holder

agriculture, the fact is that most rural poor are landless poor and therefore unlikely to benefit

directly from agriculture based policies. Instead pro-poor innovation in rural areas is more

likely to occur through small-scale ventures and entrepreneurs than industrial research and

development.

Most rural poor are entrepreneurs out of necessity (Lingelbach et al., 2005)3 and

therefore unlikely to have the capacity or willingness to take on risks associated with scaling up

to make a real impact on the rural economy. A few, generally those that are relatively less poor,

are opportunity entrepreneurs pursuing a profitable business, innovating and a looking to

grow. These growth focussed entrepreneurs (Lazonick, 2005) are likely to have a large indirect

effect on the poor by providing employment opportunities as well as improved good and

service. This paper therefore takes the view that these growth-focussed but socially relevant

entrepreneurs that are engaged in pro-poor entrepreneur-based innovation are essential to the

continuous development of, and poverty alleviation in, rural areas by creating employment,

increasing income and providing improved goods and services.

This paper introduces and discusses the concept of Pro-poor Entrepreneur-Based

Innovation (PEBI) as a way to more concretely focus on innovation pertinent to economic

development and poverty alleviation. The first part traces rural innovation in the historical

literature whilst the second part introduces some relevant entrepreneurship theories and the

final section pulls together the disparate theories to discuss the PEBI concept of rural

innovation.

2. Theories on Rural Innovation and Development

Rural development has, for most of the time since its inception in the post WWII era, focussed

almost exclusively on agriculture and how improvements in agriculture can lead to economic

1 Here innovation is defined as the continuous process of upgrading using new knowledge or the new

combination of existing knowledge, that is new to the local area (Hall, 2003; Spielman, 2005). The

innovation process thus emerges from a system of actors whose interactions, behaviour and patterns of

learning are conditioned by institutions (Freeman, 1987; Lundvall, 1992; Edquist, 1997). 2 As noted in the World Development Report (2008) which is focussed on rural and agricultural

development through innovation. 3 Reynolds, 2004 in Lingelbach & de la Vina, 2005 notes that whilst necessity entrepreneurs enter into

entrepreneurship because of external shocks such as unemployment, opportunity entrepreneurs make

their own choice to create a venture because of an identified unexplored market nice or business

opportunity. The difference between opportunity and necessity entrepreneurs suggest a different set of

drivers and incentives. For instance, necessity entrepreneurs may be willing to take less risk compared to

opportunity entrepreneurs.

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growth, development and reduced levels of poverty. Agriculture, it is believed, contributes to

structural development of a country through the supply of labour, capital, foreign exchange,

food and market for domestically produced industrial goods (Johnston and Mellor, 1961). As

economic growth and development of a country takes off, agriculture declines relative to the

industrial sector. This is due to a net flow of resources, including labour, from agriculture to

industry (Mellor, 1966). The dual sector model (Lewis, 1955) which favoured large scale

industrialised agriculture over subsistence agriculture, was based on the assumption that larger

scale farming would reap economies of scale which would increase its productivity and

efficiency. Small-scale subsistence farming would have no active role in economic development,

rather providing resources for the industrialised sector (Ellis and Biggs, 2001).

However, by the mid 1960s it was clear that little improvement had been made to the

living conditions of the poor and in fact South Asia was ravaged by severe food shortages and

the old theories had not worked in practice.

2.1. Small Farm First & Technology Transfer

A change in agricultural theory was provided by Schultz (1964) who argued that subsistence

farmers were already efficiently allocating resources, the small but efficient hypothesis. Instead

of considering subsistence farmers as passive providers of labour, and capital, Schultz put them

at the centre of the agriculture led process of economic development (Ellis and Biggs, 2001).

Small-scale agriculture, he believed, improved production on-farm and spurred the growth of

labour intensive, non-farm activities through rural growth linkages (Ellis and Biggs, 2001;

Mellor, 1966). Mellor believed in a virtuous cycle where increases in agricultural activity and

thus farmer income would be magnified by various linkages with the activities of the non-farm

sector (Mellor, 1976; Mellor, 1966). This shift to a “small but efficient” paradigm in the 1960’s

called for increased investment in research and development relevant to small-scale agriculture

so that farmers could acquire more efficient new technologies together with the skills to use

them. Furthermore, in accordance with the Induced Innovation Hypothesis (IIH) the abundant

labour would be substituted for scarce land in small-scale farming through ‘induced

innovation’. The IIH is based on the American agricultural model of extension and diffusion,

and asserts that changes in relative prices of factors of production will spur, or induce, the

development and adaptation of new technology in order to economise on the relatively more

expensive factors of production (Ahmad, 1966; Hayami and Ruttan, 1970). That the scarcity of

factors can induce innovation, resulting in technical change, became a stylised fact. Thus, it

became generally accepted that small-scale farmers in developing countries could increase

productivity substantially by using existing resources more efficiently through the use of

improved technologies and practices that had been transferred from national and international

agricultural research organisations (Binswanger, 1978; Hayami and Ruttan, 1971).

Around the same time, new high-yielding varieties (HYV) varieties that increased food

production were developed (Binswanger and Ruttan, 1978; Hayami and Ruttan, 1971). By using

modified seeds, farmers would be able to drastically increase output quantity and quality

(Lipton and Longhurst, 1989). This research originating in international research centres like IRRI,

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the Philippines and CIMMYT, Mexico4, led to a huge increase in output in selected areas of

South Asia (such as the Punjab and Haryana) in the 1960’s. It was termed the “Green

Revolution”, which came to dominate much of the rural development debate over the next

couple of decades. Though heavily criticised later on, the Green Revolution and the HYV were

credited with seeing off a severe humanitarian crisis of South Asia. This innovation was

supplier, or science led, and still today rural and agricultural policy in South Asian countries

are often focussed on supply rather than demand led innovation.

A linear model of innovation and diffusion emerged during the Green Revolution

whereby the international centres of the Consultative Group for International Agricultural

Research (CGIAR) developed generic technologies such as high yielding varieties of seeds.

These technologies would subsequently be adapted by the national research system before

national extension agencies transferred them to farmers (Biggs, 1990) who were expected to use

the new technologies as passive end users. This is a hierarchical model of innovation with a

linear one-way flow of information and technology from top to bottom. Roles within the

structure are clearly defined and networking and linkages outside of the hierarchical top-down

path are limited or non-existent in formal plans (Biggs, 1990). Informal research and farmer

participation and innovation by anyone other than the central scientists were of inferior

importance to central research (Biggs, 1990). Such transfer of technology (TOT) models rested

on the assumption that by the time a new crop or technology reached the extension services it

would not need to be further adapted by the farmers (Clark, 2002; Douthwaite, 2002).5

Separately, but in parallel with the mainstream small-farm efficiency focussed theories

on rural development, an alternative movement called Appropriate Technology emerged, based

on Schumacher’s Small Is Beautiful book (Schumacher, 1973). Schumacher criticised the general

neoclassical emphasis on blueprints, mass production and transfer of technology to developing

countries, arguing that such an approach did not make economies sustainable. Instead

Schumacher created a separate paradigm which stresses the need for technologies to be

appropriate for local conditions, to be adapted to current economic and resource conditions and

to avoid human displacement or environmental degradation. The paradigm further highlighted

production using local resources, for established local needs, as the most effective for of human

development. Within this model, technologies and the use thereof are dependent on the habits,

attitudes and perceived needs of the users and producers. Schumacher is also known as a critic

of economic growth and consumption as a measure for development and well-being

(Schumacher, 1973; Society, 2008). The small is beautiful debate did not have a substantial

impact on mainstream policy which continued to focus on the TOT model and its emphasis on

generic technologies. Recently however, the appropriate technology debate has been re-

emerging with, in particular, many actors in the third sector finding Schumacher’s ideas

appealing and especially microfinance , which emphasises self-employment, finds that it

resonates with the reality of today’s need for smaller scale, context specific solutions that

provide livelihoods for the rural poor. However, Schumacher’s school came to emphasise

engineering and (small-scale) technological solutions, ignoring the social and policy dimensions

4 The International Rice Research Institute (IRRI) in the Philippines and the Wheat and Maize

Improvement Centre (CIMMYT) in Mexico. 5 Farmers were at the time considered conservative and non-experimental

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that are crucial since Schumacher’s ideas are essentially implying a reorganisation of the

economy.

Another alternative school of thought that also emerged in the shadow of the

mainstream linear innovation model is indigenous technology knowledge (ITK) and indigenous

innovation (Chambers et al., 1989; Richards, 1985). A major contribution with respect to pro-

poor rural innovation that emerged from this field is that by Anil Gupta (1997) who developed

the concept of grassroots innovation. Its focus is on grassroots, and social innovation that

emerges from developing countries’ own entrepreneurs, small firms and NGO’s, as an internal

engine of growth in rural areas.

A final point to note is that ‘grassroots innovation’ is today often incorrectly paired with

the fashionable notion of Bottom of the Pyramid (BOP) innovation, as introduced by Prahalad

(2006). However, it should be noted that whilst Prahalad’s Bottom of the Pyramid innovation is

MNC based, and thus based on transfer of external technologies, Gupta’s grassroots innovators

are close to the PEBI concept developed in this thesis. In a sense the notion of “grassroots

innovation” developed by Anil Gupta can be considered as the endogenous, intrinsic version of

Prahalad’s external, top down version of BOP innovation (Fu et al., 2010). This thesis does not

focus, or build, on Prahalad’s ideas.

2.2. From Top-Down to Bottom-Up & Participatory Models

Despite the continuous domination of the small-farm first paradigm, rural development

scholars began to heavily criticise the TOT model for portraying farmers simply as passive

technology adopters (Biggs and Clay, 1981) and for considering only exogenous technological

change6 (and not endogenous).7 In fact, evidence suggested that farmers are natural

experimenters and participate in the innovation process by reworking generic technologies to

suit their specific needs (Biggs and Clay, 1981). It follows that farmers are actively involved in

the innovation process and by implication, innovation emerges from diverse sources. Biggs

constructs a multiple source model where innovation has many different sources including

farmers, local researchers, extension agencies, NGO’s, the private sector and R&D centres

(Biggs, 1990). In addition, Biggs (Biggs, 1990) highlights the importance of institutions. Other

criticism of the TOT model focused on how the model lets scientists set research priorities and

the fact that it operates in a manner that inherently resists change. The TOT model was

arranged in a manner which underrates farmer knowledge and the fact that farmers are

heterogeneous, risk prone, face a complex set of issues and continuously experiment, innovate

and adapt according to historical and empirical evidence (Biggs, 1990; Chambers et al., 1989).

Without challenging the centrality of the farmer-first approach established by Shultz, the

continuous criticism resulted in a paradigm shift taking place in rural development thinking

from the top-down research and intervention approach that transferred generic technologies to

6 Exogenous technology in this case being the technology transferred from international and national

researcher centres 7 The developments in rural innovation and technical change from a linear, to a participatory and finally

systemic approach mirrored the move from the linear model of innovation (Schumpeter, 1939) through

the chain-link model (Kline and Rosenberg, 1986, to today’s systemic perspectives (Freeman, 1987;

Lundvall, 1992; Nelson, 1993)

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farmers, to a bottom-up approach where farmers were not merely end-users but participating in

the innovation process. The change in tack was most clearly noticeable in the various

participatory approaches to agricultural development that appeared.8 What these methods had

in common was an effort to improve the suitability of technologies by involving farmers more

directly in the R&D process (Mosse et al., 1998). At a practical level on the ground, the actual

participation varied widely between projects, managers and agencies resulting in equally varied

results. These methods were often too context dependent as the success of a particular approach

appeared more dependent on specific local history and institutions than the actual methods

themselves, or the theoretical model behind it (Biggs and Smith, 1998). As a result, the transfer

and diffusion of participatory research methods was not more successful than the leaner

technology transfer model of innovation. Participatory models were also criticised for being a

mere label put on a wide range of activities with no clear conceptual foundation (Biggs and

Smith, 1998).

Notable among research models emphasising increased grass-root participation is

Farming System Research (FSR). This model introduced a systems perspective to agricultural

research with the aim to improve its relevance to farmers (Chambers et al., 1989; Norman, 1989;

Norman and Collinson, 1986). It uses a holistic, participatory and interdisciplinary approach

(FAO, 2001). Influenced by Farming System Research, the important Farmer First model of

Chambers (1989) emphasises the ability of farmers to learn, adapt, analyse and improve on their

own with the help of outsiders rather than by outsiders. Farmer First is a set of principles that

should be adapted to specific local needs, with a decentralised research model (Chambers et al.,

1989:182-183). As the 1990s approached, these models emphasising both participation of end-

users and the need to look at issues from a systems perspective, recognising that innovation

stem from several sources, began to significantly influence rural development thinking. A

further result of the shift to bottom-up development and participatory methods was the advent

and rise of non-governmental organisations (NGO) as agents for rural development (Ellis and

Biggs, 2001). NGOs were steadily taking on more responsibility on the ground and as well as

gaining importance in the debate on rural development and appropriate interventions.

2.3. A Shift to Systemic and Livelihood Perspectives

Farming System Research evolved in two directions relevant for this thesis. Firstly, research

continued taking on a sectoral systems dimension of farming systems research resulting in

Agricultural Knowledge and Information Systems (AKIS) and later agricultural innovation

systems (AIS). Secondly, farming systems research began moving towards an integrated on and

off-farm view of rural activities, resulting in the (Rural) Sustainable Livelihoods (SL) field. The

off-farm activities of rural livelihoods took on more significance, especially through Rural Non

Farm Sector (RNFS) research.

8 Including, among others, Participatory Technology Development (PTD), On-Farm Research (OFR),

Participatory Action Research (PAR), Participatory Rural Appraisal (PRA) and various extension

approaches.

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2.3.1. Systems and Innovation In a response to the shortcomings of earlier participatory models, authors like Röling (1986;

1988) and Biggs (1990) began to consider systemic approaches to agricultural development by

analysing the importance and nature of institutions for innovation and the relationships

between innovation and the institutional environment in which it takes place. This set of

scholars argued that without supporting the institutional environment, participatory

approaches will fail. One early systemic model is the Agricultural Knowledge and Information

Systems (AKIS) which incorporates ideas from the study of knowledge economics, highlighting

in particular the generation and diffusion of information and linkages (Röling, 1986; Röling and

Engel, 1992). AKIS emphasises that knowledge processes are social, as actors seek to influence

the process and each other through interaction. Therefore, knowledge and sharing thereof is

intricately linked with communication and information (Engel and Salomon, 1997). AKIS has

been criticised for not taking into account the historical and cultural contexts in which the

innovation process takes place as well as for lacking in understanding of the different kinds of

actors involved (Engel and Salomon, 1997; Hall and et al., 2001).

Engel (1997) went on to develop a methodology based on AKIS called Rapid Appraisal

of Agricultural Knowledge Systems (RAAKS) as a tool for considering the social organisation of

innovation and capacity building.

The most recent development in this area has been to conceptualise rural innovation

within the framework of Innovation Systems theory. Drawing on the Schumpeterian

perspective of innovation and technological change through creative destruction (Schumpeter,

1934) as well as evolutionary economics and systems theories, an innovation systems

framework was constructed (Dosi et al., 1988; Freeman, 1987; Metcalfe, 1988; Nelson, 1993;

Nelson and Winter, 1982). The Innovation Systems scholars would study National System of

Innovation (NSI) (Freeman, 1987; Lundvall, 1992; Nelson, 1993) to understand how the

difference in national set-up impacts on innovation.9 Within this NSI, innovation is a continuous

process where institutions (habits and practices), learning and networks play a central role in

generating innovation and technological change (Edquist, 1997; Freeman, 1987; Kline and

Rosenberg, 1986; Lundvall, 1992). Subsequently these ideas of a systems perspective of

innovation and technological change have been applied to developing countries (OECD, 1997).10

The Agricultural Innovation System (AIS) concept (Clark, 2002; Hall et al., 2003; Hall

and et al., 2001; Hall et al., 1998; Hall et al., 2004) builds on the NSI to focus specifically on the

9 The unit of study was originally at the national level (Freeman, 1987; Lundvall, 1992; Nelson, 1993;

OECD, 1997) but also includes regional (Cooke, 2001), sectoral (Malerba, 2002) and technological

(Carlsson et al. 2002) systems. 10 In developing countries, scholars pursued mainly empirical work on innovation which has been

summed up by Derayangala, 2006 and include: Technologies are not easily transferable and technological

knowledge is often tacit, with institutions and internal capability playing a huge role (Oyelaran-

Oyeyinka, 2003; Mytelka,1999). A lot of technological change takes place below international innovation

frontier in developing countries and considerable adaption and modification of technologies and

innovation occurs (Bell & Pavitt, 1992; Katz, 1987; Lall, 1987). Such technological activity is the outcome of

a variety of factors including the ability to learn and obtain relevant knowledge, skills and the capability

to use these (Bell 1984; Bell & Pavitt 1992; Lall, 2000).

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need for innovation induced development in agriculture from a systems perspective,

emphasising political, social and economic dimensions of knowledge creation and innovation

(Hall et al., 2003). It broadens the analysis of what creates innovation from a top down linear

model to a complex system where agents and their interactions are influenced by institutions

and this has an important influence on the innovation process. Studies on AIS in rural areas in

India (Clark et al., 2003; Hall et al., 2004) suggest that the roles of actors and their relationships

evolve over time. It follows that the system requires enough flexibility to evolve with the

changing requirements and needs of these new networks and partnerships. Within partnerships

and networks, individuals rather than organizations often play a vital role. Furthermore,

partnerships grow out of shared values and trust which have built up during a long time, rather

than from official agreements and negotiations. Personal and professional networks are

therefore important. Such partnerships should be made up of actors with different knowledge

and capabilities so that each can provide something new to others within the network. Critical

reflection and learning are important so that actors can adjust to new challenges or improve the

way they are dealing with existing ones as new knowledge and learning becomes available.

AIS as a framework for rural pro-poor innovation does, however, suffer two

shortcomings from the point of view of the current study. Firstly, it is focused exclusively on the

agriculture sector. However, it has long been recognised that the rural non farm sector (RNFS)

is a vital part of the rural economy it is expected that most of the poverty alleviating

developments are to come from this rather than the agriculture sector (Start, 2001). Secondly,

AIS is not explicitly focussed on direct solutions, such as goods, services or income, for the rural

poor. Nor does it focus on whether an innovation, or a set-up of an innovation system, is

welfare enhancing for poor rural as (Spielman, 2005) notes:

“few studies in the emerging literature on innovation systems in developing-country

agriculture ask the fundamental question: whether a given innovation is welfare

increasing. This means asking whether an innovation increases efficiency in production

or utilisation of knowledge directly relevant to those goods and services used by the

poor…, or whether an innovation improves the distribution or social surplus in a manner

beneficial to the poor”. ..”Ultimately, by putting innovation (rather than poverty) at the

centre of its study of developing-country agriculture, the innovation systems framework

is limiting its relevance and value to developing-country agriculture” (Spielman, 2005:41-

42).

Rather, (Berdegue, 2005) proposes a pro-poor innovation systems as

“a multi-stakeholder social learning process, that generates and puts to use new

knowledge and which expands the capabilities and opportunities of the poor” (Berdegue,

2005:9).

This is a natural extension of the AIS, with a clearer focus on the rural poor.

With these shortfalls in mind, the next section goes on to widen the understanding of

pro-poor rural occupational activities by using a broader Sustainable Rural Livelihoods

perspective instead.

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2.3.2. Rural Sustainable Livelihoods and the Rural Non-Farm Sector Whilst not focussing on innovation, the sustainable livelihood (SL) approach does have several

principles in common with innovation systems models, including the emphasis on multi-level

targeting, partnerships to roll out interventions and the dynamic nature of rural livelihoods. In

addition, SL takes a people-centred approach that focuses on participation and responsiveness

of end-users whilst emphasising economic, institutional, social and environmental

sustainability (Carney, 1998). SL defines ‘livelihood’ as the capabilities, assets and activities

required to make a living (Chambers and Conway, 1992) and puts the household at the centre of

the analysis of how to empower the poor (Ellis and Biggs, 2001). SL consists of a range of farm

and non-farm activities which together provide a variety of income strategies (Chambers et al.,

1989). This approach thus brings together earlier theories on farming system research

(Chambers, 1983; Chambers et al., 1989) with the food security and famine analysis school (Sen,

1981) as well as participatory approaches and poverty alleviation (Haug, 1999).

Furthermore, The SL approach does not exclusively focus on farming activities but

crucially includes those of the rural non-farm sector (RNFS)11, that make up the total activities of

rural household (Ellis and Biggs, 2001). The RNFS, which

“includes all economic activities in rural areas except agriculture, livestock, fishing and

hunting” (Lanjouw and Lanjouw, 2000:3),

is important because it has the potential to absorb rural surplus labour and help diversify risks

and employment opportunities within households (Davis and Bezemer, 2004). In fact,

opportunities for growth and employment creation are most likely among the SME’s of rural

towns (Start, 2001:501). The RNFS is characterised by great heterogeneity and varying degrees of

production which are greatly influenced by the access to capital, inequality, poverty education,

caste, ethnicity, gender, infrastructure and access to markets (Lanjouw and Lanjouw, 2000;

Davis, 2004).

Whilst the innovation system approaches focus on innovation, but tend to still be

agriculture and in particular small-farm focussed, the rural sustainable livelihood approach

emphasises a holistic view of the rural sector including the RNSF, but does not focus on

innovation. The two approaches are important and ideas from both will be used in this thesis.

The RNFS literature has noted that poverty alleviation and growth is likely to occur in the RNFS

through entrepreneurs and small firms. However, neither innovation systems nor sustainable

livelihood approaches focus on the entrepreneur or entrepreneurship as an avenue to empower

the rural poor or as the focus of rural innovation. Whilst innovation system theories put a focus

on innovation at the firm (or in the case of AIS, agriculture-related innovation), sustainable

livelihoods emphasised the household. The work on the RNFS too failed to explicitly focus on

the importance of entrepreneurs and entrepreneurship. The next section therefore, introduces

entrepreneurship literature to widen the understanding of entrepreneurship related concepts

pertaining to rural pro-poor innovation.

11 Defined as all non-agricultural activities generating income. It was viewed as a low productivity sector

producing inferior goods expected to further shrink as a country develops (Davis, 2004; Lanjouw &

Lanjouw, 2000)

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3. Theories on Entrepreneurship & the Entrepreneur

Whilst previous rural development policies have focussed on small-holder agriculture, the fact

is that most rural poor are landless poor and therefore unlikely to benefit greatly from

agriculture based policies. Instead many poor are entrepreneurs, running micro ventures, often

at subsistence levels in both agriculture related and non-farm sectors. Since a large number of

rural poor operate as entrepreneurs, many of the socially relevant innovation originate from

entrepreneurs, whether in a commercial, financial or NGO sector. Businesses run by the poor

normally operate at a very small scale with very few assets or machinery (Banerjee et al., 2006).

Banerjee and Duflo in a study on the economic lives of the poor comment that

“all over the world a substantial fraction of the poor act as entrepreneurs in the sense of

raising the capital, carrying out the investment, and being the full residual claimants for

the earnings” (Banerjee et al., 2006):10).

3.1. The Classical Entrepreneur

Entrepreneurship shares with innovation systems theory both a common origin, in the work of

Schumpeter12 (Schumpeter, 1944; Schumpeter, 1934; Schumpeter and Opie, 1961), and a lack of

definitive clarity on underlying terms and characteristics. Schumpeter’s early work saw the

entrepreneur as an individual disrupting existing equilibrium by creating new combinations of

existing resources through the process of innovation. Schumpeter later suggested that it was not

the lone entrepreneur that was the innovator but the firm (Schumpeter 1943, 1950 in Lazonick,

2008) where the entrepreneur instead acts as the leader of an evolving business.

Recent definitions of entrepreneurship in the same vein include Wennekers and Thurik

(1999), who explain that

“entrepreneurship is the manifest ability and willingness of individuals, on their own, in

teams, within and outside existing organisations to: perceive and create new economic

opportunities (new products, new production methods, new organisational schemes and

new product-market combinations) and to introduce their ideas in the market, in the face

of uncertainty and other obstacles, by making decisions on location, form and the use of

resources and institutions” (Wennekers and Thurik, 1999:47).

The entrepreneur is then

“somebody who specialises in taking responsibility for making judgmental decisions that

affect the locations, forms and the use of goods, resources, or institutions” (Herbert and

Link, 1989:31).

Put differently, the entrepreneur is an agent in the economy catalyzing change and

economic growth (Wennekers and Thurik, 1999). The main factor that links entrepreneurship to

12 Non-Schumpeterian schools on entrepreneurship include the neo-classical school, represented by

Marshall and Knight, which sees the role of the entrepreneur as that of leading the market to equilibrium

through their activities. Meanwhile, the Austrian tradition under Kirzner, focussed on the entrepreneur’s

ability to perceive new and untapped opportunities and bring together resources to meet such needs or

gaps (Kizner, 1985; Marshall, 1961). Thus, entrepreneurship can mean both the creation of new

opportunities and the response to exiting challenges, where the entrepreneur is prepared to face risks

uncertainty” (Henrekson, 2007: 720).

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economic growth is ‘newness’ through new business start-up, innovation and competition.

Using evolutionary theory, the authors emphasise the importance of innovation and the

transformation of information into knowledge, where technical change is the driving force in

the economy, supported by underlying institutions (Wennekers and Thurik, 1999:43-44).

3.2. Entrepreneurship in Developing Countries

There is a clear entrepreneurial divide between the west and developing countries. Most

entrepreneurs in developed countries are opportunity entrepreneurs, reflecting many of the

traits of the classic entrepreneur noted above, as exemplified by the success of Silicon Valley. In

developing countries, however, whilst most entrepreneurs are so out of necessity13, those that

hold the greatest promise for economic growth, development and increased employment are

the far fewer entrepreneurs that act upon perceived opportunities. The difference between

opportunity and necessity entrepreneurs suggests a different set of drivers and incentives.14 For

instance, necessity entrepreneurs may be willing to take less risk compared to opportunity

entrepreneurs.15 Nadue (2008) translates this into an apparent lack of interest in seeking out

entrepreneurial opportunities by the poor, although states that this would be because

“assuming the high risk of trying to exploit opportunities which are subject to

uncertainty may be unacceptable as the potential losses may outweigh the potential

gains. Thus manager-owners, family businesses and household enterprises often

experience difficulty in innovation and adopting new technology” (Naudé, 2008:6).

Furthermore, high entry costs due to corruption, regulations and bureaucracy makes it

more burdensome to set up a business. The opportunity entrepreneurs however, are more likely

to be better prepared for undertaking a business opportunity as well as better able to take risks.

They look to grow, to be growth entrepreneurs in other words. Since entrepreneurship

flourishes the most in small businesses with growth and innovation potential (UNDP, 2004),

growth oriented entrepreneurs are of particular importance in developing countries. These

growth oriented entrepreneurs differ from those in developed countries due to the differences

in market inefficiencies (Lingelbach et al., 2005). For instance, the challenge for new firms in

developing countries is rather than providing ‘new to the world’ innovation, to climb the value

added ladder in order to further increase economic development (Lazonick, 2008:5).

13 Reynolds, 2004 in Lingelbach & de la Vina, 2005: whilst necessity entrepreneurs enter into

entrepreneurship because of external shocks such as unemployment, opportunity entrepreneurs make a

choice to create a venture because of an identified unexplored market niche or business opportunity. See

Banerjee & Duflo, 2007 on the poor as entrepreneurs. 14 It also suggests different financing and support needs. Whilst necessity entrepreneurs are recipients of

micro credit or micro finance, which is often not sustainable or leads to growth in business and income

opportunities in the long term, opportunity entrepreneurs require capital beyond what these

organisations can offer. 15 Furthermore, the productivity of entrepreneurs in a country varies more than the actual amount of

entrepreneurs across countries, because there is an important distinction to be made between the

allocation of productive activities which result in innovation and economic growth and unproductive

activities such as rent seeking and crime that engage in tax evasion and slows down or eradicate

competition (Baumol, 1990).

15

Those that are opportunity entrepreneurs pursue a profitable business, innovate and

look to grow. These growth focussed entrepreneurs (Lazonick, 2005) are likely to a large

indirect effect on the poor by providing employment opportunities as well as improved good

and service. Therefore pro-poor entrepreneur-based innovation (PEBI) is essential to the

continuous development of, and poverty alleviation in, rural areas by creating employment,

increasing income and providing improved goods and services.

4. Discussion: Pro-Poor Entrepreneur-Based Innovation

What the preceding review arrives at is an emphasis on innovation through entrepreneurship

which in some way is beneficial to the poor, in other words pro-poor entrepreneur-based

innovation (or PEBI). It implies an adjusted view of rural development which moves away from

small-holder agriculture and farms as the main beneficiaries of anti-poverty fighting measures

and towards a recognition that many poor are not farmers and do not even necessarily wish to

be micro-entrepreneurs (as most have to be, whilst operating at subsistence level).

Furthermore, the view that the entrepreneurs with most potential for poverty alleviation

are those entrepreneurs who innovate, who look to grow and actually seek out new

opportunities would question prevalent ideas which focus either on supporting innovation in

manufacturing or supporting entrepreneurs at the micro scale through, for instance

microfinance. Rather, this paper argues that it is the slightly larger entrepreneurs and firms, and

their innovative activities that need to be supported. This goes beyond focusing on micro credit

and microfinance, or, at the other extreme industrialisation in manufacturing, to argue for an

increased focus on the gap that lies between these two concepts.

Finally, this pro-poor entrepreneur-based innovation moves beyond the common focus

on agriculture support to instead look at the broader rural idea of entrepreneur-based

innovation. By putting the entrepreneur at the centre, it avoids dividing innovative activities

into agriculture and non-agriculture based opportunities.

There is some proof among the major international institutions and agencies that the

focus on small-sale but growth and opportunity focussed entrepreneurs, and their innovative

activities is catching on. For instance UNDP is working on ‘growing inclusive markets’16 which

focuses on pro-poor innovation in rural areas. The World Bank sponsored infoDEV17 outfit

operates as an incubator and think tank on innovative entrepreneurs with a focus on ICT,

including both urban and rural area. Finally, Ashoka18, a worldwide and well recognised NGO

focuses on supporting innovative pro-poor, or social, entrepreneurs across developing

countries.

16 http://www.growinginclusivemarkets.org 17 http://www.infodev.org 18 http://www.ashoka.org

16

5. Concluding Remarks

This literature review has discussed the concept of pro-poor entrepreneur-based innovation and

argued that such entrepreneur-based innovative activities are essential for to the continuous

development of, and poverty alleviation in, rural areas, by creating employment opportunities,

and improved goods and services.

The first section found that historically, rural innovation has been equated with

agricultural innovation. This was particularly the case during the Green Revolution and its

associated technology transfer programmes. Such supply-led theories were later criticised for

focusing only on exogenous technical change in a linear manner, leaving farmers as passive

end-users. Instead there was a shift to participatory approaches and theory using systemic and

holistic views. Two strands are relevant here: systems theory which viewed agricultural

innovation as part of a complex system, and sustainable rural livelihoods theory which went

beyond agriculture to recognise activities both on and off the farm.

Whilst agricultural innovation theories centre around agriculture and the livelihood

approach on the rural household, this paper posits that rural entrepreneurs and small firms are

vital to innovation and development so entrepreneurship theories have been incorporated. The

entrepreneurship literature makes a distinction between necessity and opportunity

entrepreneurs noting that opportunity entrepreneurs are more likely to be active in the

innovation process. It was noted that explicitly putting innovation at the centre and seeing

development and innovation as a systems phenomena is a relatively recent development.

Finally, the paper argued that a different approach to rural development is needed

which shifts focus away agricultural small-holders on the one hand and industrialisation on the

other, to instead emphasise rural innovative entrepreneurs, whether agriculture or non-farm

focussed.

As regards future research, there is a need to change the support mechanisms in place to

better suit opportunity entrepreneurs. This includes financial and non-financial support

structures as well as government policy, something that future research and policy debates

need to explore.

17

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